ISAs - Individual Savings Accounts
ISAs were introduced by the government in 1999 to replace PEPs and TESSAs. They represent one of the few tax-breaks available to savers who pay income tax. Although your child is unlikely to be a tax payer and cannot open their own ISA until they reach 16 years of age, they provide an additional savings vehicle for parents.
Each tax year, you can take out either
• One 'maxi' ISA, in which you can invest up to £7,000 all in stocks and shares or split between the equity and share components with a maximum of £3,000 in cash
• A mini eqity ISA with an investment of up to £4,000 and/or
a mini cash ISA and with an investment of up to £3,000
You cannot take out both a maxi ISA and a mini ISA in the same tax year, nor can you have two mini ISAs of the same type (two mini cash ISAs or two mini equity ISAs).
Equity ISAs
Equity or 'stocks and shares' ISAs provide the opportunity to invest in the stockmarket with returns which are free of tax. Children under 18 are not eligible to take out an equity ISA but both parents can deposit up to £,000 each tax year (6 April - 5 April) in a maxi ISA on behalf of their child. But they will have to do this from their own ISA allowance.
Changes to ISAs tax credits
With effect from April 2004, holders of equity ISAs no longer benefit from tax credits on dividend income.
Dividends on equities held in an ISA are paid net of basic-rate tax, but
the tax credit has offset this. Its abolition will have the effect of
cutting each £100 dividend income to £90. But interest from cash or
bonds will continue to be paid gross into an ISA, without tax deducted.
This means that the benefits of equity ISAs may be diminished depending on
your tax band.
Mini cash ISAs
Mini cash ISAs provide combined benefits of tax exempt interest and instant access. Both parents can deposit up to £3,000 each tax year (ending 5 April) in a mmini
cash ISA on behalf of their child. But they will have to do this from their
own ISA allowance. Once a child reaches 16, they can open their own ISA.
Rates also tend to be more competitive than deposit accounts.
See Mini Cash ISA Best Buys
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